Hendry shorts China buying CDS on Japanese corporate bonds
Prominent UK hedge fund manager, Hugh Hendry (pictured), the CIO and CEO of Eclectica Asset Management, has started taking short positions on China on expectations that the Asian powerhouse will slow down, reports the Financial Times this week. Very few fund managers are taking this stance, in large part because the very process of “going short” on China is extremely difficult; shorting Chinese stocks is tricky even for Chinese nationals. Fund managers looking to take a bearish stance are therefore required to explore indirect, proxy alternatives. Hendry himself is doing this by buying credit default swaps (simply put, a form of insurance) on Japanese corporate credits, believing these to be the instruments most likely to be affected by any form of contraction.
Hendry is not, however, the only one: Jim Chanos, founder of Kynikos Associates, has been warning about China’s excessive credit and potential housing market disruption infecting the broader economy, backing up his comments by shorting construction (including Hong Kong-listed Chinese property firms) and industrial companies operating on the mainland. Hendry has been developing the CDS portfolio since opening a new fund back in June after investors showed interest. Currently, the fund owns CDS on 20-30 corporate bonds, most of which are Japanese. Hendry told the FT: “I could go to China and short equities, but that’s too volatile and I have unlimited loss. I could short commodities like copper, but that would be unlimited loss too, so I don’t like it. I could look for ways to be short Australia or Brazil, but there’s not enough optionality there. Japan is the most exposed economy industrially. If there is the slightest sneeze in south-east Asia it will give me so much more bang for my buck.”Hendry, who is paying as little as 50 basis points (0.5 per cent) annually on companies such as Nippon Steel, hopes to see the trades pay off within 18 months.
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